Chap013 - Part 3 A Framework for Tax Analysis Chapter 13...

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Part 3 – A Framework for Tax Analysis Chapter 13 – Taxation and Efficiency 1. a. Since land is fixed in supply, we expect no excess burden when it is taxed. The supply curve is inelastic. b. There are fairly good substitute for cell phones. Therefore, their demand is quite elastic, and a tax on them will have a substantial excess burden, relative to the size of revenues collected. c. Without knowing exactly what “high-tech” means, it is likely that many companies could relabel themselves as high-tech in order to receive the subsidy. Thus, the supply is quite elastic, and there will be substantial excess burden. d. A tax on economic profits does not affect behavior, and hence has no excess burden. e. & f. A tax on all computer software will have a smaller excess burden (relative to revenues collected) than a tax on one particular type of software like the Excel spreadsheet. This is because it is easier to substitute away from one type of software than software in general. 2. Equation (13.4) computes the excess burden of a tax on labor, which equals ½εwL 1 t 2 . Thus, when taxes are lowered from 39.9% to 34%, the ratio of the excess burden triangles differs only by the last term, the square of the tax rate. Thus, (34/39.9)
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This note was uploaded on 12/18/2010 for the course ECON 2003 taught by Professor Tong during the Fall '10 term at Uni. Southampton.

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Chap013 - Part 3 A Framework for Tax Analysis Chapter 13...

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